February 2006 Market Clearing in the Energy Industry 5-33 © Copyright 2006, CCRO. All rights reserved. Long duration positions in less-than-liquid energy commodities generate very large credit exposures and it is these credit exposures that are at the source of the demand for market clearing services. While it is difficult to estimate, it is likely that the great majority of demand for market clearing services is unmet. A market cannot be forced to be liquid and frequently traded, so this means of relieving an impediment to market clearing is infeasible. The long-term solution will come from deploying more credit capacity to the problem of clearing the market for long-duration or illiquid commodities. Relying on the mutual credit capacity of clearinghouse members will not (and has not) provided sufficient credit capacity. The clearinghouse must look to commercial sources of credit capacity. 5.5. Key regulators Regulators and regulation can have significant deleterious or salutary effects on the spread of clearing in the energy industry. The positions of two key federal agencies with jurisdiction on aspects of clearing, the Federal Energy Regulatory Commission (FERC) and Commodity Futures Trading Commission (CFTC), as well as the impact of state regulators, are discussed below. 5.5.1. FERC The FERC (Federal Energy Regulatory Commission) is an independent government agency, officially organized as part of the Department of Energy. The purpose of the Commission is to protect the public and energy customers, ensuring that regulated energy companies are acting within the law. FERC responsibilities include: • Regulating the interstate transmission of natural gas, oil, and electricity • Regulating the wholesale sales of electricity and oil • Licensing and inspecting hydroelectric projects and • Approving the construction of interstate natural gas pipelines, storage facilities, and Liquefied Natural Gas (LNG) terminals. The FERC’s responsibilities involve the execution side of the business and its interest is largely oriented towards “price in field” issues. (FCM’s and exchanges, through which trades clear, on the other hand, are overseen by the CFTC.) Regulated portions of the energy industry, such as pipelines, storage, and transmission facilities, which are the pricing points for energy commodities, fall directly under the auspices of the FERC. Not surprisingly, the inherent benefits of clearing are consistent with the stated goals of the FERC, as represented in its 2005 – 2008 strategic plan. Highlighted under objective 2 of the plan, fostering open competition, are a number of key elements: • Objective 2.1: Promote Effective Competition in Electric and Gas Markets.